The Effects of Disclosure Regulation: Evidence from Restaurants

This study examines the e ect of increased product information to consumers on rm behavior. In 1998, Los Angeles County introduced hygiene quality grade cards to be displayed in restaurant windows. This regulatory change provides exogenous variation in whether rms are subject to voluntary disclosure (of hygiene quality) without a standard-format, voluntary disclosure with a standard-format or mandatory disclosure. We analyze the e ect of these three regimes on rms' actual quality choices. The results show that mandatory disclosure of hygiene grades causes restaurants to increase hygiene quality by an average of 5.3%. We are also able to test whether the e ects of mandatory disclosure are di erent from the e ects of voluntary disclosure with a standard format|a test of the unraveling hypothesis. The results reveal statistically but not economically signi cant di erences. To verify that it is economic incentives driving rms to improve their quality and/or voluntarily disclose information about product quality, we also show that average restaurant revenue is higher due to the introduction of grade cards, and that the increase in revenue is higher for restaurants with better hygiene quality grades. This version: March, 2001